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Climate Risk: From Obscure to Mainstream

The inaugural gowns were barely stowed away when President George W. Bush, to the dismay of world leaders, withdrew the United States from the Kyoto Protocol. The year was 2001, and U.S rejection of the international, climate change treaty—a decade in the making—was a crushing defeat.

February 2014

The inaugural gowns were barely stowed away when President George W. Bush, to the dismay of world leaders, withdrew the United States from the Kyoto Protocol. The year was 2001, and U.S rejection of the international, climate change treaty—a decade in the making—was a crushing defeat.

Climate change leadership from within the U.S. would have to come from someplace other than the White House. Ceres, at our board of director’s urging, hatched a plan to help fill that gap by mobilizing large investors to take on the climate challenge. But first, the issue needed to be reframed in a way that would resonate with the investment community—using the language of risk and opportunity.

“Ceres has raised the bar and elevated the discussion about climate risk and the impacts to our financial community. I’ve seen their leadership change minds and spark meaningful dialogue on these issues.” --Anne Stausboll, CEO, CalPERS, the country’s largest public pension fund with more than $250 billion in assets under management

European insurers like Swiss Re and Munich Re had been advancing the concept of climate risk since the 1990s, but were getting little traction in the U.S. To jump-start the conversation, Ceres released a white paper in 2002, Value at Risk, which laid out the various risks related to climate change, including physical risks and regulatory risks, and financial ripples these would create for companies in their portfolios.

Economic risk: “Making sure that capital markets work is absolutely essential for paying pensions. Close to 70 cents of every dollar we pay for pensions comes from investment returns. We need a physical market that is safe and sound... If we tip into climate catastrophe, we cannot invest.”

“I was serving as a Deputy Treasurer for California, and sitting on the CalPERS and CalSTRS Boards in the early 2000’s, when we began seeing research showing that climate risks were impacting global businesses,” CalPERS CEO Anne Stausboll recalls. “That led to greater thinking about how that might affect the pension fund investment portfolios both in terms of risk and opportunity.”

Pressing forward, Ceres and the United Nations Foundation co-hosted the first Investor Summit on Climate Risk at the United Nations in 2003, with California Treasurer Phil Angelides and Connecticut State Treasurer Denise Nappier playing key roles. At the summit’s conclusion, Ceres and a group of 10 institutional investors launched the Investor Network on Climate Risk (INCR), etching the term “climate risk” into the financial lexicon.

From there investor interest in climate change mushroomed. The Connecticut Treasurer filed the first climate-related shareholder resolution with utility giant American Electric Power seeking full disclosure of its climate risks, including impacts of carbon-reducing regulations on its extensive coal-fired power plant fleet.

Physical risks: In October 2011, severe monsoon rains in Thailand flooded the country, forcing many manufacturers to stop production.

Extreme weather events like these, as well as hotter temperatures and more extreme droughts disrupt operations and supply chains and damage infrastructure and property. The implications for investors and businesses are potentially profound.

Investors followed with dozens of similar shareholder resolutions seeking better disclosure from oil, gas and electric power companies on their climate risks and strategies for mitigating those risks.

While investor engagement with individual companies was often fruitful, Ceres saw the need to find other more-wholesale tools for prompting a broader spectrum of companies to boost their disclosure, and began working simultaneously with investors to encourage the Securities and Exchange Commission (SEC) to require mandatory climate risk disclosure from publicly-traded companies. Ceres also began pressing the National Association of Insurance Commissioners (NAIC) to require climate risk disclosure by insurance companies.

Today, the concept of climate risk is fully embedded into the vernacular of mainstream investors. “It has become increasingly important over the years,” says CalPERS’ Anne Stausboll, “especially as climate change has garnered the attention of U.S. regulatory bodies [like the SEC].”

Framing climate change as a risk galvanized investor attention to climate change. INCR has grown to more than 100 institutional investor members with collective assets totaling about $12 trillion.

Carbon Asset Risk:

To avoid catastrophic climate change, a significant portion of the world’s fossil fuel reserves will need to stay in the ground.

Coal, oil and gas companies with reserves on their balance sheets face the risk of stranded assets when governments act to reduce carbon pollution.

Last month’s sixth Investor Summit on Climate Risk at the United Nations drew more than 500 investors. Many of these investors have joined with European, Australian and Asian investors to push for stronger national and international climate policies that will spur clean energy investment. They also came together last fall to press the world’s top 45 oil and gas, coal and electric power companies to assess their exposure to potential stranded asset carbon risks as the low-carbon economy takes hold and global demand for fossil fuels wans, beginning with coal.

Investors get climate risk. Now it’s time to shift to opportunities – specifically, the Clean Trillion. Limiting global warming to 2°C to avoid the worst effects of climate change means the world must invest an additional $36 trillion in clean energy— an average of $1 trillion per year for the next 36 years. Clean energy investment is currently at about $250 billion a year.

Closing this clean energy investment gap will be a tremendous challenge, but it offers huge opportunities as investors, businesses and policymakers come together to accelerate a cleaner, more sustainable global economy.